6/07/2010 @ 12:00AM

Nitori Furnishes Japan

One trip to America was all it took to change Akio Nitori’s life and the future of furniture retailing in Japan. It was 1972, and Nitori, then 27, was the owner of two furniture stores on the northern Japanese island of Hokkaido. On a study tour organized by an industry association, Nitori spent a week in California, shopping and observing the way Americans lived.

Nitori noticed that unlike Japan’s cramped houses, California homes had not one bathroom but two, separate rooms in which to entertain guests and family, and a swimming pool in the back yard. Americans bought color-coordinated linens, while Japanese filled their homes with a mismatched jumble of colors. American furniture was designed to make life easier for consumers, not simply to pad manufacturers’ bottom lines, as in Japan. All this, for so little: American furniture prices were a third of Japan’s.

“I understood then for the first time how poor Japan really was,” Nitori told FORBES ASIA, in his first interview with the foreign press. “I decided I wanted to help Japanese people live as prosperously as Americans.”

Today Nitori is Japan’s largest furniture and home furnishings chain with sales up 17.3% to $3.2 billion in the year ended in February, but pilgrimages to America still shape its strategy. Every year Nitori flies about 800 employees to the U.S. to visit
Wal-Mart
,
Target
and other stores. Traveling on chartered buses, the Japanese staffers scrutinize store layout and sales techniques as well as product design, materials, colors and prices. “America,” says Nitori, “will always be our teacher.”

Humble tactics like these have helped Nitori flourish in an environment that has devastated many of Japan’s traditional retailers. Anxious consumers have driven down Japanese department store and supermarket sales every year for the past 13, according to industry groups. (Some furniture is sold through those channels.) Even convenience stores, which had been faring relatively well, have reported sales declines for the past 11 months, according to the Japan Franchise Association. Furniture and home furnishings sales fell 1.7% last year to $4.8 billion, according to the Japan Chain Stores Association.

But even as traditional retailers suffer, upstart discount chains like Nitori, Shimamura, Fast Retailing (which runs clothing giant Uniqlo) and Yamada Denki are expanding briskly. These retailers offer more than just low prices. They are the new face of Japanese retail–ruthless about cost control, obsessive about profitability and conscious of fashion and design.

Analysts credit President Nitori, who ranks thirtieth on FORBES’ list of Japan’s 40 richest people this year, with a singleminded focus on keeping prices down for customers without disappointing them on quality–no small achievement in a country of picky shoppers. In 2009 Nitori (best known in Japan for its “price-cut declaration” advertisements) slashed prices four times. Only about 45% of Nitori’s sales are of furniture; the rest are home furnishings, including appliances, kitchenware, carpets and linens. A three-piece duvet and pillow set, for instance, sells for $26, and a lacy white curtain for $18. Nitori sells a large kitchen cabinet on wheels for $110.

Like rival Ikea, Nitori expects customers to assemble some products themselves, but the Japanese retailer dispatches staff to deliver and assemble heavier, larger objects for its customers. Some of Nitori’s products are 30% cheaper than Ikea’s. Deep discounts like these may be commonplace in America and Europe, but in Japan they are almost revolutionary.

As the scandals with made-in-China toys in 2007 showed, cutting prices can cut into quality. Three years ago Nitori made headlines in Japan when it recalled Chinese-made earthenware pots that appeared to leak lead when heated. Nitori turned to Kiyoshi Sugiyama, a veteran
Honda
executive he’d hired years before, to accelerate improvements in the company’s product safety and testing division.

Sugiyama asked his former colleagues for help. Today these Honda refugees, most of them in their 60s and with résumés that trace the carmaker’s international expansion, occupy a windowless room at Nitori’s headquarters in Tokyo. Filled with tools, whiteboards and boxy gray machines, the room is an engineer’s paradise. Here chairs are broken to see why they splinter, pillow covers washed with acid to see if their colors bleed, lightbulbs left on for hours to see how hot they get.

On a recent afternoon five engineers in matching blue jumpsuits huddled around as a colleague in a hard hat sat down in a chair balanced on four scales and leaned back, as a customer might. His colleagues noted the distribution of weight on the scales and took two sets of photographs of the experiment. “Nobody else in the industry does the kind of testing we do,” says Sugiyama, a marathoner who once headed up a joint venture engine factory in Guangzhou, China. “We’re tougher than all of our competitors.”

Sugiyama’s revolution is unusual in other ways. Late-career hires from other industries are almost unheard of in corporate Japan. Even more unorthodox was Sugiyama’s decision to bring mainland Chinese to join the Honda veterans on the product-quality team.

Nitori himself has little patience for convention. Three-quarters of what he sells are private brands. His company has not partnered with a name-brand designer as Target, Wal-Mart and Uniqlo have, though many of its products are designed in Europe. Though most of Nitori’s products are made in factories in China and elsewhere in Asia, unusually among global retailers it also owns two plants in Vietnam and Indonesia. There the store makes products that it doesn’t trust third-party factories to manufacture to its quality standards–certain cabinets, chests of drawers and beds.

“No other company has pursued the dual manufacturing and retailing business model to the extent that Nitori has,” says Nozomi Moriya, who covers the company at investment bank UBS. Owning factories allows Nitori to engage more directly with its third-party suppliers, she says, because they understand their business better. That helps Nitori bypass trading companies to buy direct from factories, allowing the retailer to lower its prices.

Nitori tracks a long list of data: customer traffic; the age of every store and employee; the number of quality complaints; profit and sales area per employee. To each the company assigns a target, most of which Nitori can recite from memory.

Nitori, who is meticulous about both numbers and words, believes there is an ideal age for both stores and employees. He aims to keep the average age of his stores at 24 and closes stores that are too old or that fail to attract adequate foot traffic. He’s equally cool-headed about who he hires: Nitori keeps the average age of employees between 30 and 34. “When employees are too young they don’t have the knowledge or skills we need, and no matter what we do, we can’t reform them,” says Nitori. “After 34 employees start getting arteriosclerosis and gaining weight … they become less nimble.” (Later one of his assistants has to look up the president’s official definition of “reform,” which is to “effect a fundamental change in direction.”)

Politically incorrect though they seem, Nitori’s formulas are not illegal. Japanese law does allow employers to specify age limits for new hires under certain conditions.

Nitori’s data-driven approach is working. The company has increased sales and profits every year for the last 23. Customers line up outside its wide-aisled, brightly lit store in Fuchu, a Tokyo suburb, before it opens, and cars wait to get into the parking lot on the weekends. Keiko Yamanaka, a 33-year-old soon-to-be-married secretary who recently spent $1,100 in an hour there on cupboards, pots and pans and a chest of drawers for a shared home, says the “price-cut declaration” ads got her attention. “Ikea’s products are more fashionable, but Nitori is cheaper.”

Nitori has achieved his goal of making Japanese feel richer at a time when many could use the boost. He has even succeeded in bringing color coordination to Japanese households and even to other parts of Asia: Nitori has five stores in Taiwan. Selling color-coordinated sets offers the added benefit of increasing the average number of products customers buy, which helps offset the disadvantage of being a discount furniture retailer in a country of tiny homes. Like other furniture retailers in Japan, Nitori’s products make the most of small spaces: some beds come with drawers for storage, for instance.

But at age 66 Nitori isn’t finished yet.

Back in 1972, when Nitori returned from California, he did some quick math. It took America 120 years to develop its retail industry, and he guessed it would take him 60 years to catch up. He began crafting a six-decade plan then that he continues to refine today. Sometime in the next 20 years Nitori intends to open a store in the U.S. “We’d like to return the favor to our teacher,” he says.